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EBA updated Risk Dashboard shows slight improvement of EU banks’ capital level, but NPLs still affect their profitability

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The European Banking Authority (EBA) published today a periodical update of its Risk Dashboard summarising the main risks and vulnerabilities in the EU banking sector through a set of Risk Indicators in Q2 2017. The progress is positive, but risks remain heightened on asset quality and sustainable profitability.

In the second quarter of 2017, the CET1 ratio reached a new peak since Q4 2014, increasing from 14.1% in Q1 2017 to 14.3% in Q2 2017, with all EU countries experiencing an average ratio above 10%. However, this outcome was driven by a reduction of the denominator, with banks decreasing their risk exposure amounts (by EUR 195bn), particularly for credit risk, also in connection with the liquidation or restructuring of some intermediaries.

The quality of banks’ loans portfolios continued improving, although the slow progress and wider dispersion among countries remained a concern. The non-performing loans ratio (NPLs) confirmed its downward trend of previous quarters, decreasing by 30 bps to 4.5% (Q2 2017) and reaching its lowest level since Q4 2014. This reduction was mainly the result of one-off events that impacted all bank-size classes, in particular, smaller banks, which reduced their NPL ratios 17.7%.

The average return on equity (RoE) showed a slight increase from 6.9% (Q1 2017) to 7.0% in Q2 2017, while the average RoE increased by 1.3 p.p. from 5.7% in Q2 2016. Higher profits, coupled with a reduction in administrative and depreciation expenses, contributed to improving the cost to income ratio to 61.5% (63.9% in the previous quarter).

The net interest income continued to decrease its share of EU banks’ total operating income in Q2 2017 compared to the previous year (55.4% in Q2 2017 vs 57.0% in Q2 2016).

Loan-to-deposit ratio for households and non-financial corporations (NFCs) confirmed a downward trend. It declined slightly by 60 bps to 117.5% with the increase in loans being offset by a larger increase in deposits to non-financial corporations and households.